Is A Car Mortgage Right For You?

A car mortgage can be a great way to finance a new car but it is still one out of many financial products for the automotive market. Since there is more than one option to purchase a car, is a car mortgage the right for you?

How It Works

First of all, it is important to understand how it works. As the name states, it works like a mortgage. If we were to compare it to a regular house mortgage, there should be collateral. In this case, the car serves as collateral. In this situation, the lender is at a disadvantage because cars depreciate over time, unlike homes that tend to increase in value. If you were to stop payments, the lender can repossess the car, sell it and use the preceding to cover the costs of the loan.

One important aspect to note is that new cars depreciate faster in the first years since purchase. Older cars tend to preserve their value better. However, a car mortgage is still better than a lease on a new car because, at the end of the loan contract, you will own the car outright.

Advantages

The benefit of getting a mortgage is that your other assets are protected. For example, if you have a home and get a car mortgage, the bank will only be interested in the car since that is the collateral. Your house is protected in case you default on the loan.

Another advantage is the fact that you own the car at the end. You do not need to pay any residual value or lump sums of money. The loaned amount is for the total value of the car minus the down payment.

A third benefit is that car mortgages usually have low minimum down payment requirements. Some dealerships even take customers with a zero down payment as long as they have a good credit score. This usually happens when purchasing a new car but not all dealers offer such financing options.

Lastly, a car mortgage can be cheaper than other types of loans. The interest and APR can vary depending on your down payment and credit score.

Disadvantages

The only disadvantage to a car mortgage is that you are not the owner of the car. If you want to sell it before you finish with your monthly payments, you will find it to be more difficult. The banks want to protect their assets. As the loan is in your name, selling the collateral is not something they appreciate and approve of.